In order to attract and retain customers, many merchants, such as airlines, hotels car rental companies, chain retailers, telecom providers, and the like have historically implemented frequent use programs that offer awards for incentives schemes based on purchases made by that customer. One type of loyalty program is generally referred to as a closed loop program. A closed loop program involves a single merchant database to verify and store transaction information. This database typically is built by the merchant, or subcontracted to an outside vendor for this purpose, and is operated and maintained within the IT infrastructure of the merchant or it's vendor.
In a typical closed loop program, when a customer is at a point of sale (POS) terminal they will at some point in the transaction scan their customer loyalty number (either by physically scanning a card, punching in their customer ID or using any other token that a merchant may have chosen to track customer information). This ID is then passed to the loyalty database where information about the current transaction is typically stored. Information about offers and rewards may then be passed back to be included with the current transaction in some form. After (or during) the process of scanning goods and establishing prices, the merchant could therefore potentially offer promotions. For example, a loyalty customer for a grocery store could receive a 20% discount on his purchase (or potentially a single item) based on what he purchased and contingent on the fact that he is a loyalty cardholder and had provided his loyalty number during the course of the purchase transaction. After promotions or other rewards have been established, the customer then provides tender for the transaction. Tender is often cash, credit, check and the like. In the case of credit or debit, a data flow is generated through a network association (i.e. Visa, MasterCard, Discover, American Express, etc.) to a processor and a response (approval/decline) is typically provided.
To implement a closed loop loyalty program for a merchant, unique hardware or software must be installed at the merchant's point of sale to collect user's purchase information. Because of the necessary expense of these systems, many merchants are prevented from utilizing such services and thus are very limited in the types of loyalty or promotional programs they can offer. This presents a difficult obstacle for many merchants and in particular, many local businesses have difficulty competing with regional and national chains. These businesses' fate initially depends on a local, loyal customer base. However attracting this type of customer in an area where a resource rich larger company has recently moved in or is already doing business may present a problem as the large companies can afford the overhead cost of running and administering these programs unlike many other businesses. For example, a small family owned coffee shop may want to award reward points to allow users to redeem accumulated reward points for free or discounted coffee, but they are unable to do so due to the aforementioned high costs involved. A national chain, on the other hand, may have no such issue.
Another type of loyalty program is generally referred to as an open loop program. Open loop loyalty programs are typically run by credit card issuers and aggregate rewards with a particular merchant or class of merchants (i.e. airline reward cards). In an open loop program, a customer is not able to obtain a reward or discount at the time of the purchase and is generally not rewarded for frequenting any particular merchant. In particular, after the goods have been added to the transaction and prices have been established, the customer provides their form of payment, which is typically a credit card issued by the loyalty program manager on one of the large open loop networks, such as MasterCard, VISA, American Express, Discover and the like, which heretofore have been used exclusively for transmission and approval of financial transactions. An initial authorization request is then sent from the merchant to the card processor. This is utilized to collect data for the loyalty program (which may be managed by the card processor or another entity linked to the card processor). Typically, the total amount of the purchase is collected to determine awards which may be recorded as points. An acceptance or decline of the authorization request is then transmitted back to merchant. After the transaction has settled, the program can award points based on the customers qualifying purchases. For example, if Customer X spends $Y with his Reward Credit Card, he will receive Z points towards a flight on a participating airline.
Thus, in order to obtain the benefit of an open loop system, the customer is required to only use the loyalty card (credit card) as a form of tender. Any purchases using tender other than the loyalty card are not able to be included within this type of program. Open loop programs also generally do not provide rewards specific to a merchant where the loyalty card is used, nor can they facilitate the applications of discounts or other offers at the time of purchase.